Fannie Mae 2010 Annual Report Download - page 101

the contractual terms of the loan agreement. Individually impaired loans currently include, among others,
those restructured in a TDR, which is a form of restructuring a mortgage loan in which a concession is
granted to a borrower experiencing financial difficulty. Any impairment recognized on these loans is part
of our provision for loan losses and allowance for loan losses. The higher level of workouts initiated as a
result of our home retention and foreclosure prevention efforts during 2010, increased our total number of
individually impaired loans, especially those considered to be TDRs, compared with 2009. Individual
impairment for TDRs is based on the restructured loan’s expected cash flows over the life of the loan,
taking into account the effect of any concessions granted to the borrower, discounted at the loan’s original
effective interest rate. The model includes forward-looking assumptions using multiple scenarios of the
future economic environment, including interest rates and home prices. Based on the structure of the
modifications, in particular the size of the concession granted, and performance of loans modified during
2010 combined with the forward looking assumptions used in our model, the allowance calculated for an
individually impaired loan has generally been greater than the allowance that would be calculated under
the collective reserve.
• We recorded an out-of-period adjustment of $1.1 billion to our provision for loan losses in the second
quarter of 2010, related to an additional provision for losses on preforeclosure property taxes and
insurance receivables. For additional information about this adjustment, see “Note 5, Allowance for Loan
Losses and Reserve for Guaranty Losses.”
• On December 31, 2010, we entered into an agreement with Bank of America, N.A., and its affiliates, to
address outstanding repurchase requests for residential mortgage loans. Bank of America agreed, among
other things, to a cash payment of $1.3 billion, $930 million of which was recognized as a recovery of
charge-offs resulting in a reduction to our provision for loan losses and allowance for loan losses.
• Additionally, as discussed in “Critical Account Policies and Estimates—Total Loss Reserves—Single-
Family Loss Reserves,” the impact on our expectations of future payments from servicers due to this
collection resulted in a decrease of approximately $700 million in our allowance for loan losses and we
revised our methodology for estimating the benefit of payments from servicers, which resulted in our
allowance for loan losses being $1.1 billion higher than it would have been under the previous
methodology. For additional information on the terms of this agreement, see “Risk Management—Credit
Risk Management—Institutional Counterparty Credit Risk Management.”
The decline in our fair value losses on acquired credit-impaired loans was another significant factor
contributing to the decline in our provision for credit losses in 2010 compared with 2009. In our capacity as
guarantor of our MBS trusts, we have the option under the trust agreements to purchase mortgage loans that
meet specific criteria from our MBS trusts. We generally are not permitted to complete a modification of a
loan while the loan is held in the MBS trust. As a result, we generally exercise our option to purchase any
delinquent loan that we intend to modify from an MBS trust prior to the time that the modification becomes
effective. See “Mortgage Securitizations—Purchases of Loans from our MBS Trusts” for additional
information on the provisions in our MBS trust agreements that govern the purchase of loans from our MBS
trusts and the factors that we consider in determining whether to purchase delinquent loans from our MBS
trusts. While we acquired significantly more credit-impaired loans from MBS trusts in 2010, we experienced a
significant decline in fair value losses on acquired credit-impaired loans because of our adoption of the new
accounting standards. Only purchases of credit-deteriorated loans from unconsolidated MBS trusts or as a
result of other credit guarantees generate fair value losses upon acquisition. In 2010, we acquired
approximately 1,118,000 loans from MBS trusts.
In 2009, we generally recorded our net investment in acquired credit-impaired loans at the lower of the
acquisition cost of the loan or the estimated fair value at the date of purchase or consolidation. To the extent
that the acquisition cost of these loans exceeded the estimated fair value, we recorded a fair value loss charge-
off against the “Reserve for guaranty losses” at the time we acquired the loan. We expect to realize a portion
of these fair value losses as credit losses in the future (for loans that eventually involve charge-offs or
foreclosure), yet these fair value losses have already reduced the mortgage loan balances reflected in our
consolidated balance sheets and have effectively been recognized in our consolidated statements of operations
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